Midfield Industries

Midfield Industries is entering the capital market on 19^th July 2010 with a fresh issue of 45 lakh equity shares of Rs.10 each, in a price band of Rs. 126 to Rs. 133 per share. The company plans to raise between Rs. 57 to 60 crore, depending on the price discovered, via the 100% book-built public issue, which closes on 21^st July 2010.

The company, an organised player in the industrial packaging segment, manufactures steel strapping, seals, angle boards, collated nails and also offers end-to-end packing solutions, to companies in the steel, aluminium, glass, jute and paper industry. It has an installed capacity of 12,000 MW per annum of steel strapping, which accounts for about 65% of its total sales.

The company has a customer base of over 500 clients, however it is highly dependent on a few of them, as top 10 clients accounted for 48% of its sales in FY10, 43% in FY09 and 49% in FY08.

The company plans to expand its existing manufacturing facilities at Hyderabad, Roorkee and Mumbai, as well as, establish new facilities at Hyderabad and Sharjah, UAE, with an aggregate investment of Rs. 38 crore, to be funded mainly through the IPO proceeds. The UAE facility will primarily cater to the export markets. However, the company's exports have been declining over the years; having dropped from Rs. 8 crore or 12% of sales in FY08, to just Rs. 3 crore or only 3.3% of sales in FY10.

Other object of the issue include meeting working capital needs (Rs. 5.4 crore) and general corporate purposes. The benefits due to capacity augmentation will be reflected in the company's financials only from FY12 onwards.

The company has entered into a 49:51 joint venture with Spanish company Centaur Equipos de Flejado, for establishing steel strapping manufacturing facility in India (same line of business as its existing one) to supply to Centaur in Europe. More than 3 years have elapsed, but this JV has not yet commenced any operations. Also, as per the JV agreement, the company will be selling Centaur's products in India. One fails to understand the rationale for this JV, since the company could have independently catered to the European markets.

The company's business has been growing at the steady pace. For FY10, it reported sales of Rs. 90 crores and PAT of Rs. 8 crores, earning EPS of Rs. 9.8. For FY09, it had reported sales of Rs. 83 crore with net profit of Rs. 6 crore and EPS of Rs. 7.1. However, it has defaulted in payment of 6 monthly instalments aggregating to Rs. 1.1 crore, since December 2009.

As on 31^st March 2010, its networth was Rs. 33.7 crore and it had debt of Rs. 42.3 crore, resulting in a debt-equity ratio of 1.3:1. Working Capital (or net current assets), as on that date, was Rs. 62 crores, while fixed assets was only Rs. 13.2 crore. This shows that the business is very working capital intensive.

The company has failed to manage its working capital effectively - it is compelled to offer longer credit period to its customers, but does not enjoy as favourable credit terms from its suppliers. Nearly 8 months of its FY10 sales were locked in outstanding debtors of Rs. 58.4 crore, as on 31^st March 2010, while in FY08, the outstanding debtors were less than 5 months sales. Going forward, for FY11, it estimates to offer 6.5 months credit period to debtors, whereas, it is expected to get only 3.5 months credit from its creditors.

At the lower end of the price band, the company is issuing shares at a PE multiple of 12.9 times, based on FY10 earnings, and at 13.6 times on the upper end of the price band. There is no justification for such a high PE multiple when the industry PE is less than 10 times and most of the smaller players, like Midfield, are ruling in the single digit PE multiples.

The company faces severe competition both from multi-nationals like ITW Signode, operating on a large scale in India and globally, as well as the fragmented unorganised players in India. It also enjoys very low pricing power. Also, the price-conscious industrial packaging industry has been witnessing increasing client preference for plastic strapping over metal.

We give a thumbs down to the issue, as a company clocking annual turnover of Rs. 90 crores in steel strapping and related packaging materials, does not deserve an enterprise value (market cap + debt - cash) of over Rs. 200 crores, arrived at the lower end of the price band of 126.